Citation

Discussion Paper Details

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Title: The Rise of Shadow Banking: Evidence from Capital Regulation

Author(s): Rustom M Irani, Rajkamal Iyer, Ralf Meisenzahl and Jos� Luis Peydr�

Publication Date: May 2018

Keyword(s): Basel III, Distressed debt, Interactions between banks and nonbanks, Risk-based capital regulation, Shadow banks and Trading by banks

Programme Area(s): Financial Economics

Abstract: We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.

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Bibliographic Reference

Irani, R, Iyer, R, Meisenzahl, R and Peydr�, J. 2018. 'The Rise of Shadow Banking: Evidence from Capital Regulation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12913